Any shining stars in this earnings season?

Financial journalist and commentator on 3AW and Sky Business
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The Australian profit reporting season swings into gear this week, with some of the market’s heavyweight stocks reporting, including Commonwealth Bank, Suncorp and Transurban (Wednesday) and AMP, Insurance Australia Group and AGL Energy on Thursday.

Across the market, consensus expectations are for earnings growth of about 2% – but virtually all due to resources.

What is unnerving investors is both that the earnings downgrades continue to flow, and that early profit reports have been fairly weak. Any business outside resources is suspect until it reports.

The finance sector reports this week will see further damage from the Hayne Royal Commission, with large provisions, impairments, and write-downs – even write-offs – to be brought to book for FY19.

Commonwealth Bank’s result on Wednesday will be closely watched. Investors know that there have been big impairments and remediation/compliance costs taken on board already, and that earnings will fall. FN Arena sees the bank’s reported earnings per share (EPS) sliding about 8%, from 534.3 cents in FY18 to 489.1 cents in the FY19 result: Thomson Reuters’ consensus expects 477.8 cents.

However, the dividend (full year) is expected to be at least maintained at 431 cents. This means that there will be income-oriented investors very much willing to hold the stock, on a 5.3% fully franked yield, which grosses-up to 7.5%. Of course, every CBA shareholder has their own yield, which is determined by the average buying price of their shareholding, but the point is that in a low-interest-rate environment, CBA is still considered an attractive yield stock – with analysts expecting the 431-cent dividend to be maintained in the FY20 year, too.

A complicating factor in this picture – but potentially a positive for investors – is that CBA told the market last month that it expected the sale of Colonial First State Asset Management to be completed in early August, bringing it up to $4.2 billion in proceeds. This bonus is highly likely to be returned to shareholders through a buyback or special dividend – although there is a chance that CBA could elect to boost the capital it holds for its New Zealand operations. Broking firm Goldman Sachs is already in the market with a forecast of a special dividend, of $1 a share.

But heading into the reporting season, CBA was downgraded to a “sell” by broking firms UBS and JP Morgan: in fact, on FN Arena’s panel of seven broking firms, there is a bearish view on CBA, with the best rating being a “hold” from Ord Minnett. On consensus price target grounds, analysts see CBA sliding to $73.11, or 11% downside to the current price of $81.88; on Thomson Reuters’ collation, consensus valuation is $74.00.

Suncorp on Wednesday is expected to report EPS down by about 7%, with a corresponding dividend haircut of about 12%. Analysts are also wary of the FY20 outlook, suggesting that guidance could be lowered. Analysts do see Suncorp lifting profits in FY20: at this point, FN Arena’s consensus projects a 5.3% fully franked yield for Suncorp in FY20, equivalent to 7.6% grossed-up: Thomson Reuters puts that at 5.5%, or 7.8% grossed-up. With consensus price targets above the current share price, that implies market support for SUN, if the FY20 outlook is not changed too markedly.

AMP, which also reports this week – its half-year results to June 30 – has not experienced any share price recovery since its travails at the Hayne Royal Commission. Analysts are extremely wary of the potential for AMP to lift the amount of money it has set aside for remediation costs.

According to CommSec, the market expects a half-year net profit of about $191.5 million for AMP – compared to $115 million a year ago, which was down 74%. (For the full-year to December 2018, AMP’s full-year profit plunged by 97%, to just $28 million.)

We already know that AMP will not pay a first-half dividend, courtesy of the decision by the Reserve Bank of New Zealand (RBNZ) to block AMP’s plans to sell its life insurance division (AMP Life) to British group Resolution Life: that deal was potentially going to raise a sorely needed $3.3 billion that would enable AMP to transform its operations – in particular, to re-invest in its wealth business – and “re-base” its earnings.

The customer remediation bill at AMP is already at $670 million – that could be significantly increased at this week’s result. One broker, Shaw & Partners, believes that a further $2 billion could be tacked on, which could potentially undermine the share price even further. AMP stock lost 15% last month alone, on the virtual canning of the Resolution deal – there would be many investors prepared to try to pick the bottom of AMP, but it could still surprise by going lower.

Expected dividend recovery in the year to December 2020 has AMP priced at about a 9% grossed-up yield for that year, but it will only be franked to about 61%, which will put yield investors off somewhat.

Another interesting reporter this week is baby products specialist Baby Bunting (BBN). The dichotomy here is that retail as an industry is struggling, with the sector experiencing its worst growth since the 1991 recession: for the year to June 30, according to the Australian Bureau of Statistics, retail sales rose just 0.2%. But Baby Bunting is a major player in the $2.4 billion baby goods sector, with a market share of about 12% – in a sector widely considered to be less discretionary than many others.

Baby Bunting reports on Friday, and the market expects net profit of about $14.1 million, up from 8.7% in FY18. On an EPS basis, Thomson Reuters expects 11.2 cents a share, up 47% on the 7.6 cents earned in FY18: FN Arena predicts 11.4 cents. Thomson Reuters sees the fully franked dividend rising from 5.3 cents in FY18 to 7.9 cents: FN Arena is looking for 7.7 cents. That would place BBN on a prospective dividend yield of 3.3%–3.4%, equivalent to 4.7%–4.9% grossed-up. Analysts also see scope for Baby Bunting to push the dividend higher in FY20, as earnings rise: FN Arena projects a 4.4% yield in FY20, grossing-up to 6.3%; while Thomson Reuters posits 4.3%, or 6.1%. At a current share price of $2.29, Thomson Reuters has a consensus valuation of $2.68, while FN Arena has a consensus price target of $2.75.

It must be said, however, that these broker estimates were put in place after the half-year result, and have not been greatly changed – despite some big (and intensifying) concerns about retail.

Baby Bunting is benefiting from market consolidation, store roll-outs, scale improvements and growing sales and margins – in a badly battered sector, BBN could be one of the shining lights of the reporting season. If it is not, and the expected earnings growth does not materialise in the FY19 result, investors will be rightly incensed that there was no update on changed circumstances. BBN has not made an announcement considered to be “price-sensitive” since its interim result in February, and investors have been well within their rights to consider no news as good news.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.

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